Gold's Amazing Resiliency

Gold has certainly had a rough summer, facing withering selling pressure from
record futures shorting. The resulting new secular lows have greatly exacerbated
the already-extreme bearish psychology long plaguing this metal. But considering
the howling headwinds gold has suffered in recent years, it has actually proved
amazingly resilient. This indicates strong latent demand due to accelerate
as sentiment shifts.

Provocatively while the threat of rate hikes is new, the extreme gold pessimism
certainly isn't. Gold has been continuously deeply out of favor and despised since
spring 2013. This is easily proved. Whoever your favorite bearish gold
commentator is today, dig into his archives and read what he writing back in June
and July 2013. You'll find strong conviction back then that gold was soon due
to fall dramatically lower.

For two long years now, it has been super-fashionable to be exceedingly
bearish on gold. That's been the easy mainstream stance to take. If I had an
ounce of gold for every commentary I've read since mid-2013 somberly predicting
sub-$1000 gold prices imminently, I could start my own central bank! Yet that
wildly-popular notion that gold was staring into the abyss proved dead wrong,
it refused to go significantly lower.

This has greatly confounded the gold bears, as everything has been heavily
stacked against gold. It has weathered record
futures shorting by speculators and record
gold-ETF liquidations by stock investors, along with relentlessly climbing
US stock markets and a soaring US dollar. It's hard to dream up a more-challenging
gold scenario, yet it steadfastly bucked the epically bearish sentiment to
remain amazingly resilient.

Any one of these fierce headwinds alone could've stopped gold in its tracks,
and all four together should've destroyed it as the bearish analysts long predicted.
Yet here we are years later in the most hostile conditions imaginable for gold,
and it isn't all that much lower than its initial June 2013 low! This incredible
show of relative strength was the result of big latent demand for gold
despite horrendous psychology.

So if gold didn't crumble in the face of recent years' extreme futures and
ETF selling, and surging stock markets and US dollar, what's going to happen
as these screaming headwinds inevitably abate? There is only so much futures
and ETF selling possible, and stock markets and the US dollar are forever cyclical
with no uptrends lasting forever. When even one of these headwinds reverses,
gold is going to surge.

Our chart this week looks at the last couple years of gold price action compared
to the US flagship S&P 500 stock index, the US Dollar Index, American speculators'
total gold-futures shorts, and the dominant American GLD gold ETF's holdings.
Since all these series require far-different axes, they all had to be individually
indexed to fit on one chart. The date set to 100 on these indexes was gold's
original June 2013 low.

The main reason gold sentiment is so bearish is because traders are naturally
myopic. We humans tend to greatly overweight the present when forming our opinions,
forgetting history. But for those who want to view markets rationally so they
can actually buy low, sell high, and multiply their wealth, perspective
is everything. The roots of today's extreme gold pessimism stretch all
the way back to the wild events of early 2013.

But understanding them requires some context. Between April 2001 and August
2011, gold powered an outstanding 638% higher in a massive secular bull. Although
gold was still a contrarian play over this 10.4-year-long wealth-multiplying
span, it was the best-performing sector in the world. The benchmark S&P
500 was mired in a secular bear and slipped 1.9% lower over that span, but
gold shined brilliantly.

The smart contrarians like our subscribers were aggressively buying radically-out-of-favor
gold stocks and silver stocks back in the early 2000s, after the last secular
stock bull peaked. The flagship HUI gold-stock index skyrocketed 1165% higher over
that same decade, turning countless prudent contrarians into multi-millionaires.
So even though gold
was overbought in summer 2011, it certainly wasn't hated in 2012.

Gold corrected sharply after that bull peak and then consolidated high, which
is perfectly normal. Of course greedy euphoria dissipated after gold topped,
but this metal was still doing very well. It averaged $1669 in 2012, up 6.1%
from $1573 in 2011. All gold's problems that persist to this day began in
early 2013. That's when the US Federal Reserve embarked on an extreme and
wildly-unprecedented policy.

The US stock markets were
stalling out in late 2012 after more than doubling in a powerful
bull market over the preceding several years. But the US economy remained
weak, so the Fed was very worried about flagging stock markets forcing the
US back into recession. Falling stock prices erode consumer spending, as
the wealth effect leaves Americans feeling poorer. So the Fed attempted to
preempt any selloff.

In late 2012, it launched and expanded its third quantitative-easing campaign.
This was classic debt monetization, creating money out of thin air to
buy bonds and manipulate interest rates lower. But QE3 was a very different
beast from the earlier QE1 and QE2. Unlike its predecessors, QE3 was totally
open-ended. It had no predetermined size or end date, which was radically
unprecedented in a century of Fed history.

The Fed used this QE3 uncertainty to its advantage, deftly manipulating stock-trader
psychology. 2013 saw Fed officials constantly jawboning about expanding QE3
if necessary to arrest any material stock-market selloff. Traders understood
this exactly as the Fed intended, thinking the Fed was effectively backstopping
stock markets! They came to believe stocks were riskless, that market cycles
had been eradicated.

This Fed Put concept attracted torrents of capital to the US stock markets
in early 2013, short circuiting the end of that cyclical bull that had been
born in early 2009. Money managers flocked to the surging stock markets, dumping
everything else to raise capital. This included gold, which was shunned
as prudent portfolio diversification with alternative investments was totally
forgotten. So gold utterly collapsed.

Check out the first half of 2013 in this chart above, where the gold price
plunged 26.4%! This was due to a combination of an epic
record mass exodus from the global flagship GLD gold ETF and extreme gold-futures
shorting by American speculators. In Q1'13 and Q2'13, American stock traders
dumped their GLD shares so aggressively that this ETF was forced to liquidate
129.6 tonnes and an astounding 251.8t of gold!

GLD is simply a conduit for the vast pools of stock-market capital
to flow into and out of physical gold bullion. It can only fulfill its mission
of tracking the gold price if differential buying and selling pressure on its
shares can be directly equalized into the underlying physical gold market.
So a deluge of gold supply slammed the markets in little time as American stock
traders jettisoned GLD shares to buy general stocks.

This greatly emboldened American futures speculators to make leveraged downside
bets on gold. So they dramatically ballooned their gold-futures shorts in the
first half of 2013, adding even more supply pressure. In Q1'13 and Q2'13, their
total shorts exploded by 37.9k and 76.9k contracts, which is the equivalent
of another 117.9t and 239.1t of gold respectively. All this marginal supply
crushed gold prices.

The sole reason gold plunged 26.4% in the first half of 2013 was this combined
691.2t of gold supply cast into the markets from the extreme GLD selling by
American stock traders and extreme shorting by American gold-futures speculators.
That was far too much gold to absorb so rapidly, working out to 115.2t per
month over that extraordinary span. World Gold Council statistics help put
this into perspective.

According to the WGC, average monthly global gold investment demand in 2012
before all this Fed-driven madness ran at 135.2t. So with supply temporarily
overwhelming demand as capital fled gold to chase the Fed's incredible QE3-driven
stock-market levitation, gold collapsed. That was a once-in-a-century superstorm
for gold, with this metal suffering its worst quarterly drop in 93 years in
Q2'13!

It was that extraordinarily anomalous event that created the extreme bearishness
continuing to plague gold today. In the financial markets, price action
drives sentiment. So after gold cratered in the first half of 2013, psychology
was epically bearish. Rather than seeing that episode as a once-in-a-lifetime
anomaly that had already burned itself out, analysts and traders alike
extrapolated that extreme selling indefinitely.

So they started making all kinds of wildly-bearish gold-price predictions.
Virtually everyone expected to see gold soon plunge below $1000, and
at least half the commentaries back then were forecasting $850 or less. I remember
one guy vociferously arguing for $500! The more bearish the commentators, the
more popular they became. Traders love to have their ears tickled, to hear
views that support their own.

So with everyone super-bearish on gold after its worst quarterly plunge in
nearly a century, of course this dominant worldview fed on itself. Bearish
traders wanted their outlooks rationalized, so they sought out bearish commentary.
And bearish commentators were happy to oblige, telling traders whatever they
wanted to hear to maximize their own popularity and product sales. The problem
was they were wrong.

Markets are forever cyclical, both in terms of prices and sentiment.
Once a price has fallen so far, selling is exhausted. After GLD's holdings
plunged 28.2% in the first half of 2013, the weak hands were out. And gold-futures
shorting is finite, there are only so many speculators willing to make
those super-risky hyper-leveraged bets. And once fear and bearishness inevitably
peak, they can only abate from such extremes.

So when gold hit $1199 on a closing basis on June 27th, 2013, that once-in-a-lifetime
selling anomaly was already over. Yet the extreme bearishness persisted to
today. Traders have foolishly chosen to ignore history and believe that the
Fed is miraculously omnipotent. That this central bank has the ability to magically
manipulate stock markets higher and thus gold lower forever. So stocks remain
adored, and gold despised.

But despite the universal extreme bearishness plaguing gold in recent years,
it has been amazingly resilient! Again this chart shows gold indexed
to 100 as of that initial late-June-2013 low, along with the S&P 500, US
Dollar Index, American speculators' gold-futures shorts, and GLD's holdings
individually indexed to their own levels on that fateful day as well. Despite
the unfavorable events since, gold has held strong.

From June 2013 until October 2014, the lion's share of this post-early-2013-selloff
period, gold remained above its June 2013 lows as you can see on this chart.
On average over that 16-month span, gold was trading 7.5% above that
initial June 2013 low. It's only in the past 9 months that gold has fallen
below, and over that span since starting in November 2014 gold averaged just
0.4% under its June 2013 low!

This perspective is critical, so take the time to fully digest it. In the
25 months since gold's extraordinary-anomalous once-in-a-century superstorm
low, 2/3rds of the time has seen gold averaging 7.5% over that low and 1/3rd
merely 0.4% under! Over that entire 25-month span, gold traded 4.7% above those
June 2013 lows on average. That's super-strong performance compared to the
legions of gold bears' dire predictions!

And it's certainly true that gold recently slumped to its worst lows of not
only this entire post-early-2013-selloff span, but in 5.3 years. The $1090
gold low seen in July 2015 sure feels a heck of a lot worse than the $1199
in June 2013. That's why bearish commentary and extreme downside predictions
have again exploded in popularity in recent weeks. Traders are bearish, so
they want their views rationalized.

But considering the howling headwinds facing gold in recent years, seeing
this metal down 9.2% at worst near its weakest
seasonal time of the year is pretty impressive! Go back to that chart above
and consider everything else that's happened in the past couple years. To see
gold holding strong not too far from its initial $1200ish lows is an amazing
show of strength, highlighting strong latent investment demand.

Since gold's initial June 2013 low, the wildly-unprecedented US
stock-market levitation thanks to the Fed's extreme zero-interest-rate
and quantitative-easing policies continued. The S&P 500 climbed another
32.1% higher at best as of late May 2015. And of all things that affect American
investment demand for gold, stock-market levels are the most important. Gold
is an alternative investment moving counter to stocks.

Investors continue to believe the US stock markets can rally forever, that
the Fed has succeeded in nullifying stock-market cycles. History proves this
silly notion is the height of folly, central banks can only delay and therefore
intensify cycles. This artificial Fed-fueled stock-market levitation is
going to reverse as the Fed is forced by global markets to start normalizing
its extreme policies, a huge
long-term undertaking.

When these lofty overvalued and overextended US
stock markets inevitably roll over, gold is going to return to favor. Investors
will suddenly remember the great wisdom of prudent portfolio diversification,
and rush to reallocate capital to gold which rallies as stock markets weaken.
And they are so radically
underinvested in gold today that it will take serious buying persisting
for years to even hit a 5% gold allocation.

And much of this gold buying from stock investors will funnel through that
GLD gold-ETF conduit. Since gold's initial June 2013 low, GLD's holdings have
dropped by another 29.8% at worst. That's another 289.3t of supply over the
last 25 months, a lot of gold. Yet despite this ongoing differential selling
pressure in GLD shares, gold's price has proved amazingly resilient. When GLD
buying inevitably returns, gold will soar.

GLD's holdings slid to a 6.8-year low this month after that gold-futures
shorting attack. They hadn't been that low since 2008's stock panic.
After that, investors realized they were underinvested in gold. It is a super-important
portfolio diversifier since it has a rare inverse correlation with stocks.
So over the next 21 months, they bought enough GLD shares to force its holdings
94% higher. Gold surged 42% over that span.

If someone had predicted a couple years ago that gold would hold strong while
the US stock markets shot another third higher and GLD's holdings fell nearly
a third lower, not even the ultra-rare gold bulls like me would've believed
them. Yet here we are. The only way gold could weather such raging headwinds
intact is if there is big latent buying demand out there despite the pessimism
to absorb this supply.

And the Fed-levitated stock markets and ongoing GLD mass exodus certainly
weren't the only serious headwinds facing gold. The US Dollar Index also soared
20.9% higher at best as of March 2015 since gold's June 2013 low. That parabolic
dollar surge was the result of Fed-rate-hike hopes, since higher
domestic interest rates make a currency look relatively more attractive and
competitive internationally.

A strong dollar weighs on gold primarily because futures speculators use it
as a cue for their own gold trading. And indeed American speculators' gold-futures
shorts positions rocketed higher as the US dollar was soaring earlier this
year. And they kept on climbing even after the dollar peaked, hitting new all-time
record highs this month. It was this extreme futures shorting that
forced gold to its latest lows.

With gold investors missing in action over the past couple years thanks to
the Fed's epic financial-market distortions, American speculators' gold-futures
shorting has totally dominated gold's
price action. And their total short positions were an astounding 19.5% above June
2013's levels last week. But this is an extreme anomaly. In the entire 25 months
since gold's initial low, these positions were 30.3% lower on average.

Today there are many bearish commentators claiming gold-futures shorting can
continue indefinitely, so gold can't rally. If you look at what these same
guys were writing in June and July 2013, you will see the very same claim.
Yet despite the extreme bearishness and fierce headwinds plaguing gold in the
last couple years, speculators' gold-futures shorting was mostly lower.
Short selling is finite, it burns itself out.

And just like the Fed's artificial stock-market levitation, the recent extreme
short selling will also reverse and mean revert far lower. And that will take
tremendous pressure off gold, allowing it to rally fast. If gold proved so
amazingly resilient despite the periodic sharp surges in gold-futures shorting
in recent years, imagine how much potential it has to rally as shorts are covered
and don't revisit their recent extremes.

To see gold essentially flat during most of the past couple years despite
the Fed's stock-market levitation, heavy GLD-share liquidation, parabolic US
dollar surge, and record speculator gold-futures shorting is just incredible.
Any one of these headwinds alone could very well have battered gold much lower
as the bears have long predicted. Yet all four of them together failed to
do it, which is very bullish for gold!

Someone out there is buying lots of gold, enough to offset all the serious
selling in recent years. And sooner or later Western investors who've shunned
gold will figure that out. As the stock markets and US dollar inevitably roll
over into their next down cycles, as buyers return to GLD and futures shorts
are covered, gold is poised to blast higher on strong latent demand. Contrarians
who buy in early ought to earn fortunes.

This foolish and historically-proven-false notion that central banks are omnipotent
and can manipulate markets indefinitely is ridiculous. Chinese investors are
starting to understand this, after watching their own stock
markets plummetby nearly a third in less than a month despite the
most-locally-powerful central bank in the world throwing the kitchen sink at
that selloff trying to arrest it. The stock markets still plunged.

And Fed rate hikes are actually bullish
for gold! During the Fed's last rate-hike cycle between June 2004 and
June 2006, gold blasted 50% higher despite the Federal Funds Rate more
than quintupling to 5.25% over that span! And gold skyrocketed 24.3x
higher between early 1971 and early 1980 while the Fed was forced to
hike its FFR from 3.5% to 20.0%! Gold thrives in rising rates because
they really hurt stock markets.

Gold's amazing resiliency in the past couple years despite everything stacked
against it proves there is big latent buying going on somewhere in the world.
And that will explode to the surface and catapult gold higher once these extremely-anomalous
central-bank-conjured headwinds inevitably abate. The coming gold mean reversion
higher can be played via this metal itself or the leading GLD SPDR Gold Shares
ETF.

But vastly-greater upside potential exists in the left-for-dead gold miners.
Their leading index recently slumped to an astounding 12.8-year low.
The last time gold stocks traded at prevailing price levels, gold was in the
$310s! Today it is a whopping 3.5x higher, which means seeing the same gold-stock
prices is fundamentally-absurd.
The best of the gold-mining stocks are due to skyrocket as gold mean reverts
higher!

So if you really want to multiply your wealth, invest in this most-despised
and undervalued sector by far on the planet. Brave contrarians who did this
in the early 2000s enjoyed massive gains over 17x! This is the kind
of contrarian speculating we specialize in at Zeal. Decades of experience have
taught us that no extreme lasts forever, with the greatest gains won by betting
on anomalous extremes soon reversing.

Our acclaimed weekly and monthly contrarian
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The bottom line is gold has been amazingly resilient in the past couple years.
Despite everything that's been arrayed against it, gold has held strong mostly
above its initial extreme June 2013 lows. Not a Fed-levitated stock market,
not ongoing GLD liquidations, not a soaring US dollar, not record speculator
gold-futures shorting, and not epic bearishness could force gold significantly
below its panic levels of two summers ago.

That can only mean there's been big global buying to absorb the additional
Western supply and offset the absence of Western investors. That latent demand
should explode as the US stock markets, US dollar, and speculators' gold-futures
shorts inevitably start mean reverting lower, and GLD's holdings start rebounding.
If gold could fare so well when everyone hated it, it's really going to dazzle
as it regains favor.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to
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